Managerial Extrapolation: Who and When?

In this paper, we use managerial guidance data from I/B/E/S and an extensive list of controls to show a strong overextrapolation of earnings by firm managers. We find the degree of overextrapolation is driven by the persistence of the underlying earnings process as well as factors that can affect the representative heuristics, including salience, volatility, and local housing prices. Further, firms with a high expected earnings’ growth rate subsequently underperform their counterparts by 0.5% per month. By exploiting exogenous variations in firms’ profitability resulting from the Tax Cuts and Jobs Act of 2017, we provide clean evidence for managers’ overextrapolation of past earnings.

Keywords: Guidance, Extrapolation, Over-extrapolation, Earnings

JEL Classification: G12, E44, Q43

Suggested Citation: Suggested Citation

Huang, Dayong and Lei, Lijun and Wang, Mengmeng and Xing, Yuhang, Managerial Extrapolation: Who and When? (July 10, 2021). Available at SSRN: https://ssrn.com/abstract=3884059 or http://dx.doi.org/10.2139/ssrn.3884059